UPDATE 3-Brazil's Bradesco cuts revenue forecast a second time

Mon Oct 21, 2013 11:14am EDT

By Guillermo Parra-Bernal and Natalia Gómez

SAO PAULO Oct 21 (Reuters) - Banco Bradesco SA, Brazil's No. 2 private-sector lender, on Monday trimmed its projections for interest income growth this year for a second straight quarter to account for sagging demand for new credit in Latin America's economy.

The Osasco, Brazil-based bank said in a statement that it expected net interest income, or revenue exclusively from lending activities, to rise this year by 1 percent to 3 percent. In the second quarter, it had cut its forecast for the gauge to a range of 4 percent to 8 percent, citing lackluster growth in its loan book.

The latest estimate came even as the bank's third-quarter profit beat expectations, partly because of a healthier top line. Earnings before one-time items, or recurring profit, totaled 3.082 billion reais ($1.42 billion), above the 3.066 billion reais estimate from a Thomson Reuters poll of seven analysts.

Lower revenue growth highlights the challenge facing Chief Executive Officer Luiz Carlos Trabuco, who for the past year has reined in lending to riskier segments like auto loans and focused on mortgages and paycheck-deductible credit to protect profits. Since late 2011, Bradesco and private-sector rivals have struggled with intense competition from state-run banks that led to lower borrowing costs across the banking system.

Chief Financial Officer Luiz Carlos Angelotti said the decision had nothing to do with the impact of losses in the value of Bradesco's government bond holdings since April. In the quarter, the bank partially reversed a drop in shareholders' equity incurred during the second quarter caused by a spike in yields on local debt notes.

"We had to address the issue of weak credit market trends, since we don't expect our loan book this year to grow beyond the bottom of our guidance" of 11 percent to 15 percent, Angelotti said in a conference call.

SHARES FALL

Bradesco led declines in Brazil's banking shares on concern the bank's slight earnings beat and guidance cut may presage weak results for Itaú Unibanco Holding SA and Banco Santander Brasil SA in coming days. Preferred shares of Bradesco shed as much as 1.9 percent on Monday.

Santander reports earnings on Thursday, while Itaú publishes its own on Oct. 29.

"Results were slightly disappointing," Philip Finch, a London-based strategist with UBS Securities, said in a note to clients.

Some analysts bet that recent interest-rate hikes by the central bank will help bolster revenue. Policymakers have raised the benchmark Selic overnight lending rate five times since April from a record low, slightly widening spreads, or the difference between the interest rate charged on a loan and the lender's fund-raising costs.

In the 12 months through Sept. 30, Bradesco's net interest income rose 0.2 percent to 10.62 billion reais. But the bank's annualized net interest margin, a measure of the average interest rate charged on all loans, slipped to 7 percent in the third quarter from 7.2 percent in the prior three months.

"Rate hikes still seem not to be providing benefits, as margins continued to decline driven by the change in the loan mix," said Carlos Macedo, an analyst with Goldman Sachs Group in São Paulo.

At Bradesco, revenue rose slightly on a quarterly basis after trading-related income rose six-fold. The surge in bond yields drove both this income down and shareholders' equity sharply.

To compensate for flagging credit demand, CEO Trabuco focused on expense controls and efforts to boost revenue from investment-banking, insurance and financial services. But despite those efforts, return on equity, a measure of how well banks allocate shareholders' money, fell to 18.4 percent on a recurring basis from 18.8 percent in the prior quarter.

While return on equity came in slightly above the poll's forecast of 18.3 percent, it hit its lowest level since at least the end of 2008.

Management cut provisions on bad loans for the fifth straight quarter as loan delinquencies fell, especially in consumer lending. The reduction in provisions, which directly boosts earnings by freeing up capital, was 7 percent on a quarter-on-quarter basis and 13 percent from a year earlier.

Loan defaults for 90 days or more, the industry's benchmark for delinquencies, slipped in the third quarter to 3.6 percent of outstanding credit from 3.7 percent in the second quarter. Analysts had expected the ratio to remain stable.

Bradesco's loan book reached 412.56 billion reais at the end of June, up 2.5 percent on a quarterly basis. On an annual basis, lending rose 11 percent, at the bottom of this year's forecast for credit growth between 11 percent and 15 percent.